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Property Tax Changes Ignore Consequences for Rental Property

The Government and the Reserve Bank seem blissfully unaware of the consequences of proposed legislative changes to the rental property market, according to the National President of the Real Estate Institute of New Zealand (Inc)1, Mr Murray Cleland.

Suggestions by the Reserve Bank of a Capital Gains Tax and now the Minister of Finance’s suggestion that residential rental property investors should no longer be able to claim losses against their taxes, pose huge threats to the quality of the New Zealand rental property stock, says Mr Cleland.

“Both groups should feel free to muse about how the state can best control the private property market, but before they implement their idealistic notions, they should consider the practical implications.

“New Zealand has a good quality residential property stock which is largely the result of supportive residential property investors. But if you remove tax deductibility on repairs, maintenance and interest costs; the equation is turned on its head.

“Yields in residential property are pretty low at present even with tax deductibility and frankly, I don’t think there are many people who go into it solely for the capital gain; prepared to buy a property expecting to make a loss which they can then offset against their taxes.

“The vast majority of residential property investors are there for income, not losses.”

Mr Cleland said that if a Capital Gains Tax was introduced and deductibility of expenses was disallowed, investors would simply seek to improve their returns since selling would attract Capital Gains tax – and that would mean higher rents.

“A practical alternative might be to sell the well maintained rental property in a respectable suburb and instead buy four slums on the outskirts of town, spend nothing on their upkeep and become a rack-renter.

“These changes can only reduce the size of the rental housing stock, sending rents up.”

Mr Cleland said that among the many perverse potential outcomes, one might be that more houses would come on the market for first home buyers. “But in reality, that won’t happen because investors would face Capital Gains Tax, and are more likely to either hold onto the property, or even sell their family home and move into the rental property to avoid the Tax.”

Mr Cleland said the Minister of Finance Dr Michael Cullen had drawn attention to the fact that since tax deductibility had been introduced in 1991, deductible losses had increased.

“What the Minister ignores is that the good quality rental property market has also grown dramatically since that time, creating social amenity for New Zealanders who either can’t afford to own, or chose to rent.

“The Government had better be prepared for a significant increase in its involvement in the rental property market, because private property investors will be waiting at the gate to pass them the baton.”

Similarly, the Capital Gains Tax concept would, if implemented, result in investors calculating their gains and tax liability and deciding not to sell until their return justified having to hand over part of them to the Government.

“The result will be that landlords will put rents up in the short term to improve returns and capital values, and in the longer term the private sector's essential involvement in providing good quality rental accommodation will be severely discouraged.

“A Capital Gains Tax will result in tighter liquidity in the market through fewer investment properties coming up for sale, resulting in higher prices. First home affordability will enter a new stage of crisis.”